Systematic Investment Plans (SIPs) Are Better Option In Voliate Market

Systematic Investment Plans (SIPs) are being widely advocated by mutual funds as an investment option to weather volatile markets. The last two years have seen ideal market conditions to test out the efficacy of SIPs, given the sharp rise in markets till December and the fall thereafter.Analysing ten diversified equity schemes to find out how they performed over the past two years, and evaluate the returns they delivered to SIP investors. Funds that delivered good returns for investors under SIPs were Sundaram Select Focus and DSPML Top 100. A amount of Rs 24,000 invested in these funds over 24 months has grown to Rs 28,012 and Rs 26,364 respectively till date (entry load not taken into consideration). Both funds also delivered reasonable returns to lump-sum investors and were among the top ten diversified funds in terms of returns over a two-year period, with annualised returns of about 19 per cent each.

SIPs may help you average your purchase costs over various market conditions, but they don’t necessarily help you avoid negative returns. A few funds with a large-cap orientation delivered negative returns over this period, even if investors took exposure through the SIP route.

The returns on SIP investments in large-cap funds such as Reliance Vision and Franklin Bluechip over this two-year period are in negative territory, after the sharp market meltdown. Assuming a monthly investment of Rs 1,000 between August 18, 2006 and now, the current value of the total investment of Rs 24,000 in these funds stands at Rs 22,900 and Rs 24,531 respectively. To lump-sum investors who entered these schemes two years ago, both funds have still delivered returns of about 11 per cent on a compounded annual basis till date.

SIP investment in mid-cap funds such as Sundaram BNP Paribas Select Midcap and Magnum Midcap stands at Rs 28,012 and Rs 22,294. Lump-sum return for the two-year period is 9.7 per cent and 11.8 per cent respectively.

The disparity between the top performing funds based on lump-sum and SIP returns arises due to the timing of the initial entry. Funds that witness a higher level of volatility in their NAVs, especially on the downside, are likely to offer better entry points to SIP investors. Therefore, the fund that experiences more swings than the market has a potential to reward investors better through the SIP route, rather than a fund with a more stable NAV